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A Healthy Bite Out of Organic Foods

Can pure sales growth continue during a recession?

Organic growth can be tough to come by in a recession. But what if we're talking about organic foods: Can these good-for-you products trigger substantial investment gains?

The organic food sector has delivered extraordinary growth in the past several years, with $16.7 billion in sales in 2006, 20.9% year-over-year growth, and 2.8% market share among all foods. The Organic Trade Association forecasts continued strong results, with 18% annual growth projected through 2010. Organic coffee alone reached $1 billion in sales last year, with specialty producers including Green Mountain Coffee Roasters(NASDAQ:GMCR). Not only does this company pride itself on social responsibility, but the stock has almost doubled in the past year.

But carrying wholesome products will take you only so far. Whole Foods Market(NASDAQ:WFMI) is lingering near its 52-week low as it integrates the Wild Oats retail group. Whole Foods may have produced double-digit sales growth last quarter and a same-store sales increase of 6.7%, but consumers are starting to complain about the high price of organic foods as prices for all food continue to jump.

In a recent study, it was reported that the number of consumers who think that organic products are good for them has actually dropped to 45% from 54% in the past two years as consumers react to organic prices, which can be as much as double those for "regular" products. It's not the first time that folks have wondered whether organic products are here to stay or just a trend (even though sales have risen at a double-digit pace the past nine years). Will consumers be able to afford organic products if the economy continues to falter?

Organics for everyoneOne reason for Whole Foods' recent troubles could be the increased competition in retail organic sales. Wal-Mart(NYSE:WMT) offers lower-priced organic products under its "Great Value" label. Kroger(NYSE:KR) and SUPERVALU(NYSE:SVU) also have touted their organic food offerings. These retailers are also introducing organic foods to customers who might have never been exposed to these types of foods before, potentially adding to the market.

Wal-Mart shoppers who are looking for good buys may pass on organic food in a tough economic environment, but it's not clear if health nuts will be willing to go to "mainstream" products to save a few bucks. These folks are acclimated to the high price of organic products and aren't likely to succumb to price pressures for staples such as milk, fruits, veggies, and meats. Recently, there have been articles about growing your own food, with Seattle (of course) leading the way in urban farming. While that may work in the summer, in most places, growing your own food won't necessarily work long term (and even the most die-hard tree hugger isn't going to buy a cow to produce hormone-free milk).

More organic growth?Dean Foods(NYSE:DF), producer of Horizon Organic milk, reported that demand for its organic milk was up 30% in the last quarter, but Dean had to lower prices to help deliver this growth. Dean's stock is down 36% from its 52-week high and recent results have been lukewarm at best, with profit growth tempered by rising commodity costs.

The Hain Celestial Group(NASDAQ:HAIN) produces wholesome products such as Earth's Best baby foods and Celestial Seasonings tea. Management remained "encouraged" last quarter by the fact that consumers want to live a healthy lifestyle, and the top line rose 11.2% year over year. However, the cost of those goods sold increased at a more rapid clip of 17.1%, meaning continued commodity price increases are also a concern here.

With projected double-digit growth in the organic sector for next several years, organic food producers and retailers are an interesting play in the market. However, as competition and prices continue to increase, pure plays such as Whole Foods and Hain Celestial Group certainly will have their work cut out for them to produce substantial organic growth.